The capital structure: Is debt just a policy or requerement?

Abstract

The issue about debt as part of capital structure is unclear in context of trade off theory and pecking order theory in term to identify whether it is just a policy or requirement for the firms. The objective of this study is to identify the underlie theories on firms capital structure with its determinant. This study conducts logistic regression with sample of 148 public firms listed in Indonesia Stock Exchange for period of 2011 to 2015. The result of analysis shows profitability, firm size, tangibility, and share price have relationship with capital structure. On these results, the study reports firms with higher total debt ratio shall prefer pecking order model in determining capital structures, and firms with higher long term debt ratio shall prefer pecking order model although the result indicates the agency conflict plays role in determining capital structures, while firms with lower total debt ratio and firms with lower long term debt ratio shall prefer trade off model for capital structures.